Credit Suisse expects that the provisioning concerns for Mengniu Dairy have passed and prefers YILI

The research report from Jefferies indicates that MENGNIU DAIRY (02319.HK) will announce its 2025 performance update, expecting a full-year net profit between RMB 1.4 billion and 1.6 billion, mainly reflecting a contraction in operating profit margins, as well as impairment provisions for idle production facilities and financial assets with unclear repayment capabilities.

The firm stated that excluding the impairment provisions, last year's net profit should be between RMB 3.086 billion and 3.439 billion, which is 11% to 22% lower than the firm's and market expectations. Although the provision amount is higher than expected, Jefferies believes that the related concerns are now in the past. The firm has observed that raw milk prices have stabilized at low levels, and leading companies in liquid milk have performed strongly since the beginning of the year. It is expected that the market will pay more attention to the recovery of liquid milk, business diversification, and management execution in the future.

The firm believes that the stock's risk-reward profile is attractive, maintaining a "Buy" rating with a target price of HKD 24.3. Among the Chinese dairy sector, the firm prefers YILI (600887.SH) over MENGNIU, as YILI's recovery trajectory is more robust, with better growth across various business segments, an expansion in net profit margins, and a more stable senior management team